Integrating AI tools and VAR models for actuarial applications: an analysis of EGP/USD exchange rate dynamics

Purpose The trends of currency exchange rates and key macroeconomic variables—such as inflation and interest rates—have been extensively studied in recent decades. Given the vast network of international transactions in foreign currencies, modeling exchange rates has become increasingly crucial to the actuarial calculations and the projections of cash flows in insurance industry and investment firms. Thus, this study aims at analyzing the dynamics between the three key variables—currency exchange (EGP/USD), interest rates and inflation rates in Egypt, as an example of a developing economy, over the period from January 2017 to August 2023. Design/methodology/approach Two approaches are adopted in our analysis: the first applies a vector autoregressive (VAR) model to a structured numerical data for projection purposes, along with, examining cause–effect relationships between the three variables using the Granger causality test, the second utilizes AI-tools implementing Natural Language Processing (NLP) and Question Answering (QA) techniques to extract insights from unstructured qualitative textual data in economic reports through zero-shot prompting. Findings The findings suggest that incorporating two lags improves the accuracy of exchange rate projections and that the exchange rate is significantly influenced by relative interest and inflation rates ( p = 0.066), and in turn, it Granger-causes interest rates ( p = 0.007), with approximately 29.3% of the variation in the exchange rate explained by the model. Meanwhile, AI tools enhance contextual understanding of the three variables under study within socioeconomic context providing actuaries with a more comprehensive and timely economic overview. Originality/value By implementing a hybrid analytical approach, we aim to deliver a comprehensive evaluation that enables actuaries to better understand the trends in the three key variables (exchange rates, inflation and interest rates), and the interrelationships between them for projection purposes. Integrating advanced AI tools complements traditional quantitative techniques (VAR model) with qualitative insights from textual reports providing actuaries with an efficient and timely strategy for understanding the evolving economic landscape and the environment in which they operate.